Grant @ myposdepot
growlands@myposdepot.com
Credit card processing fees charged to each individual merchant depend on a few basic variables. To best explain how these rates and fees are determined you must first understand the concept of interchange. Interchange is the rates that each card issuer (Visa, MasterCard & Discover) charge the credit card processor to run each individual sale. Each type of credit card is given an interchange percentage rate and transaction fee and this is always determined by the card issuer. The rates vary because some card types offer incentives, rewards, or some type of promotion to their customer. To make up for this added cost the card issuers charge higher rates to accept these incentive cards.
The card issuer also charges higher rates depending on the risk involved in processing the transaction. For example a merchant who does not physically swipe the card is considered to be processing a less secure transaction because the magnetic strip on the card is not being verified. This is called a CNP or “Card No Present” transaction. These two factors are how the credit card issuing bank determine the interchange rate for each card type. On top of the interchange rate the company who processes your transaction is also going to mark up the rate so they can profit from the transaction.
The markup charged by the card processor can be come in three basic forms or pricing structures. A flat rate pricing structure is best described as a type of pricing where a single rate and transaction fee are charged no matter what type of transaction the merchant runs. This is the least effective pricing structure because unless the merchant is always processing the same card type, they are being charged rates to cover the cost of the most expensive card types. The flat rate is going to be higher than all interchange rates to assure that the credit card processor covers their cost to process each transaction. This type of pricing is not very popular because the credit card processing industry has so many competitors and it is easy for any individual company to beat.
The interchange markup can also be in the form of tiered pricing. This pricing structure is very common for most retail merchants in the United States. Tiered pricing is based on a set of rates that will be charged to a specific card type. For example four tier pricing has four sets of rates that depending on the type of card the merchant runs will be charged to that specific card type-
TIER 1 – Standard Check / Debit Cards (Cards issued by a bank normally linked to a checking or savings account
TIER 2- Standard Credit Cards – Cards swiped at the point of sale that offering no major incentives to its customers
Tier 3- Manually entered credit cards or cards that offer basic rewards or incentives to its customers
Tier 4- Key entered rewards cards and/or business cards, signature cards, world cards, purchasing cards, basically this is the majority of your rewards or incentive cards
Each tier has a flat transaction rate and fee that is charged depending on the card type to assure that the card is being charged a higher rate that the interchange rate that the card issuer is charging.
The last pricing structure is called interchange plus pricing. As simple as the name is this type of pricing charges the merchant the specific interchange rate that each card is given by the card issuer and a flat markup above the interchange rate which will be profit for the card processor. For example if a Visa Signature card has a rate of 1.6% plus a transaction fee of .10 cents and the merchant is on interchange plus pricing with a markup of .10 percentage or basis points plus a transaction fee of .10 cents the total cost will be 1.7% plus a transaction fee of .20 cents. This type of pricing is the most cost-effective for the merchant because no matter how many cards they process or what type of cards they are the markup above cost will always be the same. In this case the markup is .10% (basis points) plus .10 cents per transaction. This type of pricing is usually only offered to high volume merchants who have a low average ticket and run a lot of sales for example a restaurant.
Now that you are familiar with the types of pricing and what credit card processing rates and fees consist of here is an overview of the many types of cards that are available to qualified customers:
MasterCard and Visa
Also know as “Bankcards” because a bank issues them. If you look at your credit card, there will be an issue bank on the front or the back of the card (Bank of America, Wells Fargo, Chase, etc.) They are a genuine credit card; the owner is given a credit line and a minimum payment is due every month. This is the most popular forms of borrowing in the US.
Charge Cards
American Express, Discover, JCB and Diners are charge cards; although, in 2007 Amex and Discover are beta testing a “Bankcard”-issuing their cards through a bank. Charge Cards are not issued through a bank but by a financial institution. JCB (Japanese Credit Bureau card) Issued to Japanese businessmen in the US and Japan. The Japanese Central Banking System, in the 1980’s, created this card so all funds will be processed through the Japanese Central Banking System rather than American Banks.
Private Label Cards
A private label card is issued by a retail outlet and contains the name and logo of the retailer (Macy’s, Gap, Shell, Sears, etc.) It is only accepted by the retailer who issued the card. It is usually financed by a bank or card issuing Management Company.
Secured Credit Card
MasterCard or Visa with a set spending limit secured by an equal amount of funds deposited into an account at the issuing bank. This is popular for people with bad credit trying to increase their credit standing.
Pre-Paid Cards
Similar to phone cards where an owner will purchase the card in increments, $5-$100. When the funds are used up the card can be thrown away or “re-loaded”.
Co-Branded Cards
Also know as Rewards Cards where a large corporation partners with a bank. These cards provide an incentive back to the card holder when used. These cards are more expensive for merchants to accept, higher interchange rates, which is how they can offer incentives to use their card.
Debit/Check Card
This is an ATM card with a Visa or MasterCard logo issued by a bank to its clients. It can be used as an ATM Card or otherwise known as “on-line debit” where a PIN number is entered into a pin pad by the card holder. This transaction passes through the debit networks (NYCE, Pulse, STAR, Interlink, etc.) it does not pass through interchange. The merchant is charged a flat fee with “on-line debit”. When the card is used as a credit card with a signature, the transaction goes through interchange and is called an “off-line debit”. NOTE: A pin pad is needed to accept debit transactions. If a customer has a pin pad they are using from another Merchant Acquirer, it will need to be “swapped out” for a pin pad with an Alpha Card encryption
EBT (Electronic Benefits Transfer)
This is a government issued card which was originally designed to replace food stamps. All federal benefits are now being paid by EBT. If a merchant is set up to accept EBT, they are issued a Financial Credit Services number (FCS ID). This number must be entered into the “Terminal Account Set up Form” in order for the merchant to process via EBT. A pin pad with a Buypass encryption must be used by merchant to accept EBT.
Contactless Cards
New technology that used Radio Frequency Identification (RFID) and allows consumers to pay for purchases by “waving” their card in front of the POS device equipped with the contactless reader.
If you have any questions or would like more information about myposdepot products or services please contact
Grant Rowlands
(866) 480-2433
growlands@myposdepot.com
Tags: American Express, bundled merchant account, commercial cards, competitive edge, credit, credit card acceptance, Credit Card Processing, Credit Cards, Discover, EBT, EBT state and government cards. Customers happier, gift cards, Increase check-out speed, interchange pricing, MasterCard, merchant account services, merchant processing, merchant services, myposdepot, pci compliance, rates and fees, tiered pricing, Visa
Grant Rowlands
National Account Executive
P: (866) 480-2433
C: (215) 421-3333
F: (215) 494-0368
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